Economic Factors. Opportunity Costs Economic choices involve tradeoffs o A.K.A. – opportunity costs Definition: those things that economic choices make.

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Presentation transcript:

Economic Factors

Opportunity Costs Economic choices involve tradeoffs o A.K.A. – opportunity costs Definition: those things that economic choices make us give up o Every economic choice has alternatives o When an economic choice is made the opportunity to choose the alternatives is lost o Example: Using part of your paycheck to eat dinner at a restaurant means you cannot use that money for a down payment on a house.

The True Cost of an Economic Choice What the person is willing to give up to obtain something Cost includes not only the money spent in buying the item or performing the preferred action but also the economic benefits, or utility, that the person did without because of the decision

Production & Consumption Prices are a common cost that is set by a balance of production & consumption Prices are determined by costs of business and an estimate of what consumers are willing to pay However, the price must allow for a profit They act like traffic signals directing the flow of economic activity to their most efficient use for producers want to increase profits and consumers want to decrease the impact on their income. Production: the supply of goods & services Consumption: the demand of consumers

Production & Consumption Supply: the amount of goods or services available at a particular price o Ultimately determined by what the market price is o Market price depends on amount demanded and what suppliers are willing to produce Demand: measures what people are able & willing to buy at a given price

Incentives Forms of encouragement Used by businesses to influence the economic decisions of consumers Typical incentives include: o Added benefits o Lower costs Examples: o Toys offered in kid’s meals o Frequent flyer programs o Sales

Wants vs. Needs Wants: things desired Needs: necessities for survival Both should always be ranked in their order of importance when making economic choices Needs generally rank higher than wants: o Food is more important than a movie Wants should also be prioritized o Going to school is more important than junk food

Immediate Gratification Economic choices should always be based on long-term benefits & costs Immediate Gratification: when people only think about short-term satisfaction o Choices are self-defeating o Future costs may outweigh present benefits o Example: using credit cards irresponsibly: cost of debt outweighs satisfaction of purchases

Types of Business Costs Fixed costs: business costs that do not depend on the level of production o Example: Rent Variable costs: depend on a firm’s level of production o Example: Overtime pay Total costs: combination of fixed & variable costs into the overall cost of operating at a particular rate of production

Types of Business Costs Marginal Costs o Measure the balance of costs & benefits from the decision to produce an additional unit of good or service Marginal Cost of the Additional Unit o Cost of the additional factors of production needed to produce the unit o Example: Auto Manufacturer wants to make an additional truck  Marginal cost refers to: materials, labor, building costs that went in to making it  Company stops increasing production when marginal costs lower profits

Revenue Price: the producer must determine the willingness of consumers, or the demand, the total and marginal costs of the product, and the desired profit in determining the price. Once a projected price is determine the producer can estimate revenue in order to determine the profit. Total Revenue is the amount of money a business takes in from selling a good or service; price*amount sold=total revenue Marginal revenue is the additional revenue from selling one more unit Profit is then determine by subtracting total revenue from total costs

Division of Labor & Specialization Concept originated with the economist Adam Smith in the 18 th century Division of labor breaks down a job into a series of specific tasks for maximum production o Each worker focuses on one or a few tasks o Allows workers to practice and perfect a particular set of tasks

Division of Labor & Specialization Specialization: the specific task and skills that an individual contributes to the division of labor Concentration on single tasks increases labor productivity

Division of Labor & Specialization Assembly Line o Uses division of labor and specialization o Example: automobiles are made on an assembly line in a factory Mass Production o Made possibly by the division of labor & specialization o Low skilled workers use machinery to produce large numbers of standardized products

Division of Labor & Specialization Automation o Use of technology and machinery to do the work of human beings o Robotics: Recent development in automation Benefits of Automation: Increases productivity & lowers business costs Drawbacks of Automation: Puts people out of work

Human Capital Definition: a person’s skills & ability to be economically productive Some comes from natural talents & abilities Most comes from education & training Education & training is especially important in our current economy which depends heavily on innovation

Innovation Definition: creates new inventions & technologies used in business success Come from the machines to technology Contribute to economic growth Recent inventions or technological innovations with large economic impacts: o Computers o Virtual reality o Wireless networks

Workers Total number of workers makes up the nation’s labor force Categorized according to the kinds of jobs they perform and their skill levels White-collar workers: named for the white dress shirts they used to wear – typically office workers Blue-collar workers: named for the blue work shirts factory workers used to wear – jobs that involve manual labor

Workers Skilled workers: have jobs that require special training, abilities, and knowledge o Examples: surgeons, pilots, plumbers Un-skilled workers: perform jobs that do not require special training o Examples: picking crops, working on an assembly line o Usually less pay and offer fewer benefits

Business Organizations Allow people to combine capital and enterprise to do business for profit Come in different forms: o Sole proprietorship o General partnership o Limited-Liability partnership o Corporation

Business Organizations Sole Proprietorship o Single owner o Owner takes all risk and all profit General Partnership o Form through an agreement among the owners o Each partner is fully liable for all business debts o Partners decide together what to do with profits

Business Organizations Limited-liability partnership: o Must file a certificate with the government o Organization that is more formal than general partnership o Nature of the business is still determined by the partners o Limited partners have limited liability for business debts

Business Organizations Corporations o File charter/certificate with the government o Formal organization prescribed by law o Shareholders have a limited liability for the business’s debts and share in the profits through the value of stock or dividends

Agribusiness Farming as mass production Also manufactures & distributes farm equipment & supplies Plays a role in financing agriculture Recently has taken the lead in developing genetically modified grains, fruits, and vegetables